The Real Asset Risk Spectrum: Core to Opportunistic Styles

Core, core plus, value-add and opportunistic are descriptive words the market uses to sort real assets by how much of the outcome is already contracted. Nobody enforces them and no definition binds anyone. Nilgiri Real Assets Fund I, invented, holds five assets that sit at different points: a contracted solar asset, a warehousing park, an office, a retail centre 62.0 per cent let at entry, and a road under construction.

Start with the fact that governs everything else about these four words. There is no register of these four words, no test an asset passes, and no authority anywhere that settles which one applies. They are descriptive labels the market reached for because it needed shorthand, and they spread the way any useful shorthand spreads: by being repeated. Two managers can describe the same building with two different words and neither of them can be shown to be wrong, because there is nothing to be wrong against. That is not a defect in the words. It is what the words are.

So there is no taxonomy to learn. A label is only as good as the characteristics behind it, and the skill worth having is noticing when somebody has applied a label and shown no characteristics at all.

What are these four words actually sorting?

One axis, and it is not risk in the abstract. The axis is this: how much of what happens next is already written down in a document somebody has signed. Everything else follows from that single question, and once it is in hand, the four words stop being categories to memorise and start being regions on a line.

Two people both drive for a living. The first has a written arrangement with a school: the same route, five mornings a week, a fixed monthly amount, renewed each year for the last eight years. The second parks at a station and waits for whoever walks up. Both of them drive. Both may end the month with money. But asked what each will earn next Tuesday, only one of them can show a signed document. That difference, and nothing grander, is the axis all four words sit on.

A real asset works the same way. At one end, the price and the quantity of what the asset sells are fixed in advance by an agreement with years left to run, and the buyer's job is essentially to collect. Income fixed that way is contracted incomeIncome whose price and quantity are fixed in advance by a signed agreement.. At the other end there is no income at all yet. The works that would produce it are unfinished, and what happens next depends on events that have not happened and might not. Everything between those two ends is a question of degree: how much is written down, for how long, and how much of it falls due for renegotiation soon.

Who decides which label an asset gets?

Nobody, and this is worth being blunt about because almost every place these words appear presents them as though somebody does. There is no body that publishes a definition of core. There is no register in which an asset can be looked up. There is no test an asset sits and passes. The four words are market usage, and market usage has no keeper.

Ordinary life works the same way. Nobody defines a mid-range restaurant. There is no authority that rules on whether a shop is a supermarket or a large grocery. People use the words, the words do a job, and the edges are argued about forever without anybody being able to settle it. The four labels are exactly that, applied to buildings and roads and generating assets, and the fact that a great deal of money moves while the words are being used does not give them a definition they never had.

Some things around these assets are defined, and the line between those and the labels is worth drawing. Nilgiri Real Assets Fund I, invented, is a registered vehicle. Its registration, its reporting and the conduct rules attaching to it are set by the Securities and Exchange Board of India, which changes them. The current text sits at sebi.gov.in. That machinery is real and written down, and it says nothing whatever about whether a given warehouse is core. The vehicle is regulated; the adjective is not.

What puts an asset at the contracted end?

Core

An asset sits at the contracted end when it is producing income today and a signed document already fixes a large part of what that income will be for years ahead. That is the whole content of the word coreA market label for an asset whose income is already largely contracted.. Notice what is not in that sentence: no size, no sector, no country, no age, no opinion about quality, and above all no return. The characteristics are producing and contracted, and the label is a summary of them.

Nilgiri Real Assets Fund I, invented, holds two assets that arrive at that end by quite different routes. Set the two side by side and the label's reach becomes visible: what it captures, and what it hides.

Asset 3 is an operating solar generation asset that was already running when the fund bought it, at a cost to this invented fund of Rs 90,00,00,000. The asset sells its output under a twenty-five year contract, of which fifteen years were still to run at the record date, so ten had already gone. Its net operating income of Rs 9,90,00,000 a year is 11.0 per cent of the Rs 90,00,00,000 this invented fund itself paid for it. The denominator is one fund's own cost, so a buyer who paid something else would read a different percentage off the same asset. The 11.0 per cent is not what places the asset. The fifteen years place it: price and quantity are set in advance, in one document, for a stretch of time longer than most people stay in a job.

Asset 2 is a warehousing park costing this invented fund Rs 80,00,00,000, and it is 95.0 per cent let, that figure being physical occupancyThe share of a building's leasable area that is let.. Its net operating income of Rs 7,20,00,000 a year is 9.0 per cent of the Rs 80,00,00,000 this invented fund paid for it, again that fund's own figure on its own cost. Its income is contracted too, but by several leases rather than by one long agreement, and a lease has an end date. So the park is producing, and heavily let, and its documents will one day run out and have to be replaced by other documents. Same end of the axis, different machinery underneath.

Hold on to the honest bit. A contract means somebody has undertaken to pay, and an undertaking is not a certainty. The counterparty still has to pay, every year, for fifteen years. A long agreement is a long agreement and nothing more than that.

Why did the market need a word between two others?

Because the two ends left too much unsaid in the middle. Plenty of assets are unmistakably producing and yet have a real slice of their income falling due to be renegotiated soon, and calling those assets by the same word as an asset with fifteen contracted years left flattens a difference that actually matters. The label core plusA market label for a producing asset with a real part of its income due to be renegotiated. exists to name a producing asset where a meaningful part of what happens next is not yet written down.

Asset 1 of Nilgiri Real Assets Fund I, invented, is the case. The office is a grade-A building costing the fund Rs 1,20,00,00,000, and it is 88.0 per cent let, that being its physical occupancy. Its net operating income of Rs 15,00,00,000 a year is 12.5 per cent of the Rs 1,20,00,00,000 the fund paid for it. The denominator is again one fund's own cost, so the percentage moves the moment a different buyer pays a different price. On that much alone it would sit at the contracted end without hesitation.

Now read one line further down the schedule. Of the 2,64,000 square feet that are let, 74,000 sit on leases that expire within eighteen months. The denominator changes the number, so name it: 74,000 is 28.0 per cent of the 2,64,000 let, and it is 24.7 per cent of the 3,00,000 square feet of leasable area, and those are two different statements about the same 74,000 square feet. Either way, a real slice of this building's income reaches a lease expiryThe date a lease ends and its rent has to be renegotiated or replaced. soon, and what replaces it is not written down anywhere yet. The near expiry is the characteristic. The label is just the shorthand for it.

The household version is worth carrying. Two people each earn the same amount. One has eight years left on a written arrangement. The other is on a contract that ends in fourteen months. Today, on any statement of what they earn, they look identical. The difference is entirely in a date, and a date is exactly the sort of thing a headline income figure cannot show.

What does it mean to buy a gap?

An asset is described as value-addA market label for an asset bought with the intention of improving what it produces. when the buyer paid for it with a specific shortfall in mind and a specific intention about that shortfall. The asset produces something. The same asset visibly does not produce what an asset of its kind, fully let, would produce. The distance between those two is the gap, and the gap is what the price was negotiated around.

Think of a two-storey shop where the upper floor has been shut for years. Everyone on the street can see it is shut. When the building changes hands, both sides can see it too, and the number they agree on is a number for a building with a shut floor, not a number for a building with two working floors. Nobody is being fooled. The shortfall is in the price.

Asset 5 of Nilgiri Real Assets Fund I, invented, is a retail centre bought to be improved, at a cost to this invented fund of Rs 40,00,00,000. At entry it was 62.0 per cent let, against 88.0 per cent on the fund's office, and the difference between those two figures is 26.0 points of occupancy. Its net operating income at entry of Rs 2,80,00,000 a year is 7.0 per cent of the Rs 40,00,00,000 this invented fund paid for it, that fund's own figure on its own cost, and it is the lowest of the four producing assets on that measure. The 26.0 point gap is not an accident that turned up after the purchase; it is the reason the asset was bought at the price it was bought at.

One discipline matters before going further. Both figures on asset 5, the 62.0 per cent and the Rs 2,80,00,000, are stated in this record at entry. The record fixes them there and says nothing at all about what either of them did afterwards. A schedule that stops at entry supports no claim about what followed.

What puts an asset at the other end?

Opportunistic

No income at all yet is what puts an asset at the far end. The works that would produce the income are unfinished, and risks are live there that no running asset carries. That is the word opportunisticA market label for an asset whose income does not exist yet., and the absent income is the visible part rather than the substance.

Asset 4 of Nilgiri Real Assets Fund I, invented, is a road under construction. The fund has committed Rs 70,00,00,000 to it, of which Rs 45,00,00,000 was drawn at the record date, and that Rs 45,00,00,000 is 12.0 per cent of the Rs 3,75,00,00,000 this invented fund has deployed across all five of its assets. Its income at the record date is Rs 0. Not a low figure, not a thin figure: nil. A road that is not finished carries no traffic, and traffic is what collects the money.

Four risks sit on it, and this record names all four. There is construction risk, meaning the work itself may cost more or take longer. There is contractor risk, meaning the party doing the work may fail to do it. There is land and clearance risk, meaning the permissions and the land assembly the project depends on may not arrive in the shape or at the time assumed. And there is a fourth risk, that the contracted payments never begin at all. A payment stream that starts on completion starts only if completion happens. Not one of those four exists on asset 3, the operating solar asset, and that single fact is what puts the two assets at opposite ends of the same axis.

The comparison needs no finance at all. A shop that is open has customers who may or may not come. A shop that is half built has no customers, a builder who may walk off, a landlord dispute that may not resolve, and a licence that has not been issued. The second shop is not a worse shop. The second shop has not been built yet, and every question about it is a question about whether it ever will be.

How are the five assets placed?

By asking four questions of the documents and the state of the asset, in order, and letting the label fall out at the end. The four answers are read first, and the label follows from what they add up to. A label chosen first and justified afterwards has the order backwards. That ordering matters more than it sounds, because the reverse order is how a label ends up doing work the characteristics should be doing.

The four questions are these. Does the asset produce income today? Is that income contracted, or does it come from documents that each end? For how long is it written down? And how much of it falls due to be renegotiated soon? Nothing in that sequence asks what sector the asset is in, what it cost, or what anybody thinks of it, and nothing in it has a threshold. There is no occupancy figure below which an asset becomes one thing and above which it becomes another. Anyone who offers such a figure has invented it.

Where do the five actually land, and what put them there?

Run the sequence across all five assets of Nilgiri Real Assets Fund I, invented, and the placements come out like this. Asset 3, the operating solar asset: produces, contracted, fifteen years still to run, nothing to renegotiate soon. Asset 2, the warehousing park: produces, 95.0 per cent let, income from several leases rather than one agreement. Asset 1, the office: produces, 88.0 per cent let, and 74,000 of its 2,64,000 let square feet on leases expiring within eighteen months. Asset 5, the retail centre: produces, 62.0 per cent let at entry, bought with that shortfall in view. Asset 4, the road: produces nothing at all, four live risks, no payments started.

One comparison does more work than any of the others. Line the five up by what each produced on its own cost, and the order is not the order of the labels at all. The office, sitting a step in from the contracted end, produces Rs 15,00,00,000 a year, which is 12.5 per cent of the Rs 1,20,00,00,000 this invented fund paid for it, the highest of its four producing assets on that measure. The solar asset, at the contracted end, produces 11.0 per cent of the Rs 90,00,00,000 this invented fund paid for it. The warehousing park produces 9.0 per cent of its Rs 80,00,00,000. And the retail centre, the one bought to be improved, produces 7.0 per cent of its Rs 40,00,00,000 at entry, the lowest of the four. Every one of those is this invented fund's own figure on its own cost, at its own record date, and none of them is a return anybody should expect from anything.

A reader who expects the label to predict the yield has the relationship backwards, and this record shows exactly why. Asset 5's figure is low because it was bought with a problem in plain view, and the price paid reflected that problem. The label and the yield are answers to two different questions: one describes how settled the income is, the other describes what the income was as a fraction of what this fund itself paid. There is no reason for those two orderings to agree, and here they do not.

What do these four labels leave out?

How does anyone actually use a label they cannot check?

The four words are useful. Shorthand that lets a room full of people sort forty assets in an afternoon is worth having, and none of this is an argument against using the words. The argument is only about what they are: descriptions, written by whoever is describing, resting on characteristics that are themselves written down elsewhere and can be checked. The word finds the row. The row is then read.